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Rotman Commerce
Michael Szlachta

Ch 19 Understanding Securities and Investments Securities Markets - securities: stocks and bonds(which represent a secured-asset bas claim on the part of investors) - stockholders have claims on some of a corporations assets (and a say in how the company is run) bc each share of stock represents part-ownership - bonds represent strictly financial claims for money owed to bondholders by a company - stocks and bond sold in securities markets Primary and Secondary Markets for Securities - primary securities markets: the sale and purchase of newly issued stocks and bonds by firms or governments - these so-called private placements allow the businesses that use them to keep their plans confidential Investment Banking - to bring a new security to market, the issuing corporation must obtain approval from a provincial securities commission - Also needs the services of an investment banker - Investment banker: any financial institution engaged in purchasing and reselling new stocks and bonds 1. advise company on timing and financial terms for the new issue 2. by underwriting (buying) the new securities, investment bankers bear some of the risk of issuing the new security 3. they create the distribution network that moves the new securities through groups of other banks and brokers into the hands of individual investors - secondary securities market: the sale and purchase of previously issued stocks and bondsToronto Stock Exchange(TSX) Stocks Common Stock - individualscompanies buy a forms common stock in hope that stock will increase in value, affording them a capital gain, andor will provide dividend income - stock values are expressed in 3 ways : par value market value book value - Par value: o Face value of a share of stock o Each company must preserve the par value money in its retained eanings, and it cannot be distributed as dividends o Used by accountants but of little significance to investors - Market value: o Stocks real value o Current price of a share on the stock market o Market value reflects buyers willingness to invest in a company o Market price of a stock can be influenced by both objective factors and subjects factors (rumours), investor relations( playing up the positive aspects of a companys financial condition to financial analysts and financial institutions), stock broker recommendations - Book value: value of a common stock expressed as total stockholders equity divided by the # if shares of stock o owners equity-sum of companys common stock par value, retained earnings, and additional paid-in capital o used as comparison indicator because, for successful companies, the market value us usually greater than the book value when market price falls to near book value, some investors buy the stock on the principle that it is underpriced and will increase in value in the future - Investment Traits of Common Stock o Common stocks are among the riskiest of all securities o Uncertainties about the stock market can quickly change a given stocks value o When companies have unprofitable years, they often cannot pay dividends o Shareholders income-and perhaps share price-may both drop as a result o Common stocks offer high growth potential o Blue-chip stocks historically provided investors with steady income through consistent dividend payouts - What is a Blue-Chip Stock? o Blue-chip stock: stocks from well-established, financially sound forms o With proliferation of internet and start-up dot-coms about a decade ago, some ppl started to think that perhaps many of the old performance guidelines for assigning blue-chips status to stock had changed o Guidelines such as a companys history of dividend payouts, steady growth in earnings per share, and a low price-earnings ratio(currents stock price divide by annual earnings per share) didnt seem to matter anymore bc the market price of start-ups that hadnt ever earned a profit were soaring Market capitalization: the dollar value (market value) of stocks listed on a stock exchange Computed by multiplying the number of a companys outstanding shares times the value of each share In terms of market capitalization almost all of the companies in the top 10 are either financial institutions or natural resource companies o Royal Bank of Canada o Toronto Dominion Bank
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